Monday, January 9, 2017

Ever since the rial hit an all-time low against the greenback on Dec.
27, top monetary policymaker Valiollah Seif has been reiterating that
the Central Bank of Iran (CBI) will use every tool available to
strengthen the national currency. Speaking at an e-banking conference on
Jan. 2, Seif vowed that the rial’s recent drop will be reversed, adding that its ideal value is 36,000 against the greenback.

Having retreated from its peak of 41,340 rials, the US dollar is
currently trading for between 32,000 and 40,000 rials — but the public
expects a further appreciation of their national currency.

In the past decade, the rial’s value has depreciated by around 450%.
The Iranian public has been greatly sensitive about fluctuations in the
currency’s value, as it believes that a weakening rial is a sign that
inflation is about to take off. Indeed, given that the Iranian economy
is highly reliant on imported raw materials and capital goods, a drop in
the rial’s value does lead to a jump in commodity prices. Aware of
public expectations, CBI officials have always tried to manipulate the
market in favor of the national currency.

However, the policy of keeping
the rial stronger than it really is has had its own critics. Given the
large inflation differential between Iran and the United States, the theoretical value
of the US dollar reached 47,690 rials in 2016, Al-Monitor noted on Jan.
6. As such, pro-market economists believe that the CBI should let
supply and demand determine the value of the national currency.

Yet amid the recent and sudden drop in the rial’s value, the CBI has
come under attack for allegedly having consciously let the national
currency depreciate. Critics argue that as the government needs to curb
its budget deficit, the regulator has allowed the rial to devalue — a
move that would help the government access more rials per petrodollar
through arbitrage given the multiple exchange rates.

“Undoubtedly, the administration takes the most advantage of the situation
to cover its budget deficit” as the Iranian year approaches its end (on
March 19), Ezzatollah Yousefian Molla, a member of the parliamentary
planning and budget committee, said as reported by Tasnim news agency
Dec. 31. Economists Farshad Momeni, Mohammad Gholi Yousefi and Jamshid
Pajouian are all of the opinion
that the CBI could indeed be behind the latest dip in the rial’s value
in the weeks running to Dec. 27.

Yet Yousefi expressed sympathy with the
regulator, arguing that the government has no other alternative to
cover its budget deficit. In his view, the administration either has to
impose heavy taxes on agriculture and manufacturing or resort to having
the CBI sell foreign currency at higher rates.

Use of arbitrage between the official and open market exchange rates
as a tool to curb budget deficits is not unprecedented in Iran.
“Previous governments also used the same method,” Tasnim Dana news
website quoted Pajouian, a professor of economics at Allameh Tabatabai
University, as saying in August 2015. The process is usually such that
in case the government faces a budget deficit, the CBI will let the rial
depreciate on the open market and then proceed to sell foreign currency
at the higher rate. After a while, the CBI will step in to end the
fluctuations, thus slightly strengthening the rial.

Many economists and
pundits share Pajouian’s suspicion, but it should also be considered
that the Central Bank faces financial constraints....MORE